Reckoning for a Real Estate Mogul

Harry Macklowe isn't afraid of bad weather. Three years ago a storm came up while the New York developer was sailing with friends near the Corsican coast on Unfurled, his 112-foot yacht. His wife, Linda, and their guests, attorney Samuel Lindenbaum and his spouse, took refuge in their cabins. They were all seasick. Macklowe, however, donned foul-weather gear and happily went up on deck to help sail the yacht with his captain and crew. "It was amazing," Lindenbaum recalls. "Harry was competing with nature -- and he won!"

Now the 70-year-old developer is in the middle of a maelstrom of a different kind. This time it's in the credit markets. Thanks to his personally guaranteeing a $1.2 billion loan last winter, he may lose billions of dollars in real estate, his homes in Manhattan and the Hamptons, his contemporary art collection, and even his beloved yacht. This would be a bitter end to the career of one of New York City real estate's most polarizing figures.

In the clubby world of developers, people either admire Macklowe or detest him. The strong feelings were shaped by two events -- one famous and the other infamous -- that bookend his nearly 49 years in business. First, he is the guy who in 1985 shamed his industry when he ordered the late-night demolition, without a permit, of four buildings, including a welfare hotel, in Times Square. Second, and more recently, Macklowe pulled off a feat that was nothing short of alchemy. In 2003 he surprised his peers by purchasing the General Motors Building for the then-record price of $1.4 billion. The landmark is now worth twice as much -- thanks largely to his idea of putting a sunken Apple store on the building's plaza with a glass entrance at street level. "Harry drew me the design of that store on a piece of paper before he'd even bought the building," says CB Richard Ellis's Mary Ann Tighe, whom the developer hired as the building's leasing agent. Macklowe not only personally sold the idea to Apple CEO Steve Jobs but also negotiated a lease giving Macklowe Properties a cut of the store's revenues. If only the college dropout from New Rochelle, N.Y., had stopped there. Instead he followed up the GM deal with an even bigger one that has turned into the most celebrated commercial real estate catastrophe in the subprime mortgage crisis.

In February 2007 the developer bought seven Manhattan skyscrapers for $6.8 billion from the Blackstone Group. It was the peak of the market. There was plenty of easy money available. Macklowe put up only $50 million of his own cash, financing the rest of the acquisition with $7 billion in loans, due in February, from Deutsche Bank and Fortress Investments, a publicly traded hedge fund. That's a huge amount of short-term, high-risk debt. Once the subprime crisis unfolded, Macklowe couldn't refinance. Now he is handing the keys to those buildings back to Deutsche Bank and other lenders to which the bank has sold some of the debt. He is also trying to sell his precious General Motors Building to repay a $1.2 billion bridge loan that is controlled by Fortress.

Meanwhile, the entire real estate business is watching to see how this plays out for two reasons. Macklowe's difficulties don't bode well for his industry. Not long ago, investors would have fallen all over one another to get a stake in his high-rent properties. Now the demand for trophies may be waning -- even in Manhattan, the nation's most valuable market. That's grim news not just for Macklowe, but also for investors around the country who poured billions into office buildings before the credit crunch.

Here's another reason Macklowe's financial pain has drawn such attention. He is a Houdini-like character who has extricated himself from tight spots before -- like back in the early '90s when the real estate market collapsed and his creditors called in $1 billion worth of loans. He survived in part due to his cunning but also because he was dealing with commercial banks willing to accommodate him. Those old-school lenders wanted a long-term relationship with a guy who, in his own words, has a "voracious appetite for capital."

As real estate prices have skyrocketed in recent years, however, developers have gone to hedge funds like Fortress for the riskiest pieces of debt. These new, more opportunistic lenders charge interest rates that can rise above 20%. If a developer defaults, some hedge funds are more than happy to grab their collateral and flip it for a potentially higher profit. This is referred to as the "loan to own" business.

In the case of the seven skyscrapers purchased from Blackstone, Macklowe personally guaranteed the $1.2 billion bridge loan. That hunk of debt is part of a portfolio overseen by the hedge fund's president, Peter Briger Jr. The Princeton-educated banker couldn't be more different from his borrower. Briger made his name trading distressed Japanese assets in the '90s. Like many of his colleagues, he scrupulously avoids the media. (Fortress declined to comment for this story.) This much, however, is certain: Briger is showing Macklowe no mercy. Fortress is salivating at the possibility of foreclosing and taking possession of the General Motors Building, which he pledged as part of a personal guarantee against the bridge loan. In addition, Fortune has learned that the hedge fund is assessing the value of the developer's personal assets in case the trophy, encumbered by $1.9 billion in loans, isn't enough to satisfy Macklowe's obligations.

If Briger decides to do this, Macklowe will undoubtedly fight back. He may never have dealt with a lender like Briger, but Fortress's president, tough as he may be, has never tangled with a borrower quite like Harry Macklowe either.

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